Leveraged loan repricings resurface despite strong new issuance

NEW YORK(LPC) - At least three US companies including warehouse retail store BJ’s Wholesale Club are seeking to cut borrowing costs on existing term loans after a surge in new money issuance this year put a brake on opportunistic repricing and refinancing transactions in July.

July saw 139 US companies turning to the leveraged loan market to back buyouts and raise new debt, according to Thomson Reuters LPC. However, not a single issuer attempted to cut pricing on existing loans, the data shows.

Opportunistic deals dried up as a wave of new money deals during the second quarter tipped the market in favor of lenders that were able to push back on deals and bargain for better pricing. In all, US$245bn of new paper was placed during the second quarter, the highest volume since the second quarter of 2007 hit a record US$261bn.

Repricing activity has returned though for strong credit as new deals have slowed down.

“Loan repricings are driven by both volume and tone in the market,” said a senior banker. “You’re dependent on soft call protection rolling off and the general tone in the marketplace. The market didn’t feel all that great in July and there were a lot of new deals getting done. Investors had their choice of deals to pick from, so they didn’t have to simply let deals reprice.”

The room for more opportunistic deals might also be limited as the earlier refinancing waves have pushed the maturity wall further to 2023 and 2024, according to Eric Rosenthal, senior director of leveraged finance at Fitch Ratings.

“There’s very little coming due in 2018, 2019, and even 2020,” Rosenthal said. “We have only US$88bn in institutional term loans due over the next two and a half years, which is striking. You are seeing some deals get done at 175bp over Libor with some Double B names. It can’t go much lower than that.”

HARD TIME

Repricings may be back in the market only as an option for companies with specific credit events as opposed to the broad repricing trend that allowed companies to reprice their loans almost at will every six months earlier this year and last year.

For example, in June BJ’s raised net proceeds of US$637.5m in its IPO, which the company will use to completely repay its US$625m second-lien term loan. The company is also paying down a portion of its first-lien debt. Moody’s upgraded BJ’s corporate family rating to B1 from B3 following the successful IPO, citing its pro-forma leverage ratio reducing to around 5.4 times earnings before interest, tax, depreciation and amortization from 6.2 times.

BJ’s is using this event to ask lenders to cut pricing on its soon-to-be US$1.5bn term loan due in 2024. The company on Wednesday lowered the rate to 300bp over Libor with a 25bp stepdown when net first-lien leverage drops to 3 times. BJ’s lined up the loan at a size of US$1.925bn to back a dividend recapitalization in January 2017 at a price of 375bp over Libor.

“I think we’ve repriced so much of the market, the opportunities are now limited,” said the banker. “Unless there has been a structural change to the credit such as a deleveraging event, you’re going to have a hard time.”

Also looking to cut pricing is chipmaker Cypress Semiconductor, which on Tuesday launched a repricing of its US$503.8m term loan B with guidance circulating in the 175bp-200bp over Libor range with a 0% floor. Cypress in March priced the then US$505m term loan, due July 21 2021, at 225bp over Libor.

Moody’s upgraded Cypress’s corporate family rating to Ba3 from B1 in February on continued improvement in operating performance.

Natural gas electricity producer Compass Power Generation on Wednesday started shopping a price cut for its US$744m term loan with guidance in the 325bp-350bp over Libor range. The company arranged the loan at a size of US$750m in December 2017 to back a dividend recapitalization, issuing the debt at 375bp over Libor with a 1% floor.

“I’m guessing (these repricings) are going to get done,” said a portfolio manager. “These are very good quality companies. There’s not a lot of high-quality paper out in the new pipeline. It will be an interesting test to see if the demand is still there. I don’t think Single B credits could get repricings done though in this environment.”

Looking ahead, M&A activities will be the biggest driver of the loan market, which is expected to continue to give investors the ability to put their money to work with new deals instead of holding onto existing loans at lower prices, Rosenthal said.

Several jumbo US buyout loans are expected to launch after Labor Day, including a US$13.5bn loan and bond financing backing Blackstone Group’s purchase of Thomson Reuters Financial and Risk (F&R) unit and a US$8.05bn financing for KKR’s buyout of physician services provider Envision Healthcare.

Blackstone announced on January 30 that it was buying a 55% majority stake in Thomson Reuters’ F&R unit, which includes LPC.